Recently, the virtuous circle between wages and inflation has begun to strengthen. Following the highest wage hike in the past thirty-three years at the spring wage negotiation, nominal base wage surprised on the upside by rising +2.3% YoY in April, the largest increase since July-94. Furthermore, with inflation expectations remaining above 2%, corporate service prices also picked up by +2.8% YoY in April.
Nevertheless, the relatively hawkish comments from the BoJ suggest that the Bank could adjust further as early as June, even with the glass half full. The Bank could decide to effectively reduce purchases of JGB to support the weak Yen (Chart 2) by eliminating its commitment to purchase the same amount of bond, when the US Treasury yield is falling. Still, the BoJ is likely to keep the option to purchase JGBs at its discretion, to prevent bond yield from surging.
Furthermore, the BoJ could decide to hike to create room for a rate cut to prepare for rainy days. With the policy rate currently targeted between 0.0-0.1%, the option is limited to a return to non-conventional policy tools whose negative side effects were acknowledged by the BoJ’s extensive policy review. Therefore, the Bank is expected to take advantage of the recent positive news flow to justify its policy adjustment. - Natixis
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